Edited version of private ruling

Authorisation Number: 1011721876434

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Ruling

Subject: legal expenses

Question

Are you entitled to a deduction for legal expenses incurred in defending a driving charge?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You had been employed as a bus and coach driver for a number of years.

While driving a bus in the course of your employment you were involved in a traffic accident.

You continued to drive pending an action being taken by the police.

You later appeared in the magistrate's court and were found guilty of a criminal offence.

You immediately had your driver's licence withdrawn and the loss of your bus driver's authority, hence your ability to earn an income.

You appealed the criminal offence conviction and regained your driver's licence on a stay pending completion of the appeal process. You did not have your bus driver's authority reinstated.

Your appeal is continuing and should you be successful you will regain your bus driver's authority and resume your employment as a bus driver.

You incurred legal expenses in defending your criminal conviction and will incur further legal costs for the appeal process.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing your assessable income except where the loss or outgoing is a capital or private nature.

In determining whether a deduction for legal expenses is allowable, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634;(1946) 3 AITR 436 ;(1946) 8 ATD 190).

The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. If the advantage to be gained is of a private nature, then the expenses incurred in gaining the advantage will also be of a private nature.

The courts, on a number of occasions, have determined legal expenses to be an allowable deduction if the legal expenses arise out of the day to day activities of the taxpayer's business or employment (Magna Alloys and Research Pty Ltd v. FC of T (1980) 49 FLR 183, (1980) 11 ATR 276; 80 ATC 4542).

Taxation Ruling IT 149 examines the situation where legal expenses are incurred by a business for fines or breaches of law. Where you take liberties with the law in the interests of more efficient operation then the legal expenses are considered to be in connection with the imposition of penalties for unlawful acts, rather than in the furtherance of your business.

However where you have acted in good faith and you were exposed to prosecution as a result of your income earning activities, the expense incurred in defending yourself would be attributed to this earning activity.

In FC of T v. Rowe (1995) 31 ATR 392; 95 ATC 4691, the taxpayer, an employee, was suspended from normal duties and was required to show cause why he should not be dismissed after several complaints were made against him. A statutory inquiry subsequently cleared him of any charges of misconduct or neglect. The court accepted that the legal expenses incurred by the taxpayer in defending the manner in which he performed his duties were allowable. The activities which produced the taxpayer's income were what exposed him to the liability against which he was defending himself. Since the inquiry was concerned with the day to day aspects of the taxpayer's employment, it was concluded that his costs of representation before the inquiry were incurred by him in gaining assessable income.

In your case, you incurred legal expenses in defending the charge of negligent driving occasioning grievous bodily harm. The charges arose from your conduct and actions as an employee and in the course of completing your employment duties.

Consequently you are entitled to a deduction for the legal expenses you incurred in defending the charge under section 8-1 of the ITAA 1997.

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